Don’t Expect a Sharp Reversal in Aurora Cannabis Stock

Potentially slower growth in medicinal cannabis will impact the ACB stock valuation and extend cash burn

The decline in Aurora Cannabis (NYSE:ACB) stock has been unabated in 2019. ACB stock is down 57% at $4.50 from its 2019 highs near $10 in March. I do believe that the selling is overdone. However, I don’t see any reason for a sharp rally in ACB stock. In other words, the stock can trade marginally higher or sideways, but is unlikely to be a portfolio catalyst anytime soon.

Bearish on Aurora Cannabis Stock
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Aurora Cannabis anticipates the global medical cannabis opportunity to be worth as much as $70 billion CAD. And the company expects the broader consumer cannabis opportunity to be worth $115 billion CAD. Despite this potential, ACB stock has been sliding for the last six months.

While there is a big potential market, it remains untested. The medicinal benefits of cannabis are also debatable. Therefore, I believe that be it the medicinal or consumer segment, growth is likely to be more muted. The markets are discounting steady progress in the cannabis industry. Earlier, they discounted aggressive growth.

Medicinal Cannabis Opportunity Is Debatable

Cannabis companies are marketing medical cannabis as a massive opportunity to investors. However, it might just be too early to conclude that medicinal cannabis has significant benefits.

Just as an example, researchers at the Stanford University School of Medicine have concluded that legalization of medical marijuana does not reduce the rate of fatal opioid overdoses.

According to said Keith Humphreys, a Stanford University professor of psychiatry and behavioral sciences:

“If you think opening a bunch of dispensaries is going to reduce opioid deaths, you’ll be disappointed. We don’t think cannabis is killing people, but we don’t think it’s saving people.”

In 2019, Charles Broderick, an alumnus of Massachusetts Institute of Technology and Harvard University, made a donation of $9 million towards cannabis research. The objective of the donation is to bridge the “critical gaps in knowledge” on the impact of cannabis for medicinal and recreational use.

Clearly, the addressable market depends on the outcome of ongoing research in this field. While research might eventually prove the medicinal benefits of cannabis, investors might wait years for this growth inflection point.

Of course, it’s not all negative. Cannabis was found to be an effective muscle relaxant. It is also a treatment for glaucoma and for managing nausea and weight loss. However, making inroads in these segments would require aggressive marketing — and that implies further cash burn.

Regulations Can Impact Growth

Another concern for the medicinal cannabis industry is that regulations vary country to country. While there is a potential market opportunity of $70 billion CAD, it might again be years before several markets open up.

The U.S. Food and Drug Administration has been working toward creating regulations. It makes sense for companies to move ahead with production and aggressive growth once there is clarity on that front.

A potential challenge for companies that ethically follow regulations are companies that flout norms. Just as an example, the FDA has issued warning letters to firms that have been marketing unapproved drugs using cannabidiol. These products “are not approved by FDA for the diagnosis, cure, mitigation, treatment, or prevention of any disease.”

Therefore, the regulatory environment is likely to be challenging and will impact the growth trajectory for Aurora Cannabis and other leading players in the industry.

My Final Words on ACB Stock

A recent study printed in the Annals of Internal Medicine indicates that adult emergency department visits related to edible and inhaled cannabis exposure have been steadily rising in Colorado with the legalization of cannabis. This, among other factors discussed, highlights the challenges that the industry faces.

ACB stock is likely to remain sideways or lower as cash burn sustains amidst the challenges. I certainly do believe that Aurora Cannabis stock is among the best bets in the cannabis industry along with Canopy Growth (NYSE:CGC).

Overall, long-term investors should avoid ACB stock even after the steep decline. From a trading perspective, the stock looks attractive.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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